The Power of the Market
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Dakin UsiatynskiSteven ButtrickPrinciples of Economics1 September 2016 ‘The Power of the Market’ is the first chapter of ‘Free to Choose’ by Milton Friedman. Friedman reviews two different types of economies to begin this chapter. The first of the two is a command economy which is essentially an economy where prices, incomes, distribution and other elements are determined by a federal government. The second type of economy is voluntary exchange which works off of buyers and sellers freely and willingly engaging in market transactions. Friedman suggests that in order for an economy to thrive, the command and voluntary exchanges should be combined. Commands are to be ‘supplemented by voluntary contributions’ (P1). There is not one society that sufficiently runs based off of one of these economies. Additionally, Friedman uses the I Pencil story by Leonard E. Read about how a pencil is made, its purpose is to demonstrate market functions. The story explains how people from all different backgrounds can be part of making a product without ever having to see each other. This passage also correlates with one of Friedman’s next points about the self-interests of human beings. There is an exchange that will not take place if both sides cannot find some type of benefit. Failing economies neglect this factor and only make a point to provide benefits to one side, but overall people will not cooperate if their self-interests are not being entertained.Next, Friedman begins price systems and the ways that it assists in regulating the economy. A price system is a structure of economic allocation that is based upon monetary prices by supply and demand. discussing the transition of information from the buyer to the seller. The first way the price system regulates the market is through the transmission of information. In order to be more efficient, only information that is necessary will be sent to the seller to the buyer or vice versa. For example, a change in demand and supply is necessary information but the reason why the change occurred is needless. Only significant data is exchanged to avoid the clutter of data that will be of no use. Essentially, only the people who are in need of the information will search it out. However, Friedman explains that government interference can create severe issues within the workings of the free market by setting high tariffs and taxes on international trade and fixed wages and prices.
Furthermore, Friedman continues speaking about the price system and begins to explain the second way of regulating markets, which is incentives. The idea is basic and is also briefly discussed in the authors summary of the I Pencil story. Humans revolve around self-interest; it is how work gets done. So when you apply that to the price system the concept fits in just the same. No one (neither consumer nor producer), will complete an action without there being an incentive for themselves. A consumer will not buy a high priced item if it is the same exact quality as a lower priced item. On the other side, a producer will not put extra time and money into creating that high quality item if the statistics show that they could make the same amount of money selling a quality item. Workers also consider incentives and self-interest, satisfaction in a job tends to outweigh a lower wage, but a higher wage will compensate for an unsatisfactory job. Friedman closes up the discussion of the price market by explaining distribution of wealth. The free market is set up in a way where it can naturally redistribute its wealth. Most income is determined by the difference between the selling price and the cost to produce, the major productive resource is human capital. 75% of income will go to wages for workers while the rest goes to fund personal services. The expansion of physical capital has aided in economic growth, without it capital gains will dissipate from generation to generation. Friedman also notes that many people find themselves upset with the natural workings of the market and attempt to find a way to ‘fix’ it. The author explains that ‘fixing’ the free market would lead to a lack of incentives on both sides, the command system would worsen causing the government to have more control over the market and workers find themselves frustrated with bureaucracies and their policies. A command system does not work as efficiently as the free market and causes disruption in the distribution of income. Then, Friedman discusses the self-interest within the market. He debunks the common notion that the free market runs off of greedy people who only respond when monetary stimuli is a factor. If every person develops their own interest and pursues a career in that field, then more production is occurring. People will only do the work assigned when they dislike the field they are in, if they hold interest in their jobs then they tend to go the extra mile. There are always attempts to better and expand self-interest, which over time will eliminate the bad aspects of that field.